Here is a note I wrote with my friend and former partner David Evans on the Ninth Circuit’s decision in the Monster Energy case. Please see the ABA copyright notice at the end.
Like judges, arbitrators are paid for their time. Judges, of course, draw a salary from the treasury, while arbitrators are paid by the parties. The freedom to choose an arbitrator best suited to the case is one of the great advantages of arbitration, but because some businesses are “repeat players,” appearing frequently before a particular arbitral body, commentators have long worried about the skewed incentives “repeat players” might create for ADR providers or arbitrators. Monster Energy Co. v. City Beverages, LLC was a dispute between Monster, maker of a popular brand of “energy drinks,” and City Beverages, a franchisee that did business as Olympic Eagle. When Monster sought to terminate the parties’ contract, Olympic Eagle invoked Washington’s Franchise Investment Protection Act, which requires good cause for a termination. Monster moved to compel arbitration with JAMS, the arbitration provider specified in the parties’ agreement. The arbitrator, a former state court judge, found in Monster’s favor, and also ordered Olympic Eagle to pay Monster $3 million in attorneys’ fees. But when Monster sought to confirm the award, Olympic Eagle moved for vacatur, arguing that the arbitrator had failed to disclose his ownership interest in JAMS.
The arbitrator did disclose that like “each JAMS neutral,” he has “an economic interest in the overall financial success of JAMS.” He also disclosed that he had previously been the arbitrator in a case in which Monster was a party and that the parties “should assume that one or more of the other neutrals who practice with JAMS had participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future.” Thus, although the arbitrator disclosed an unspecified economic interest in JAMS prior to the arbitration, Olympic Eagle was unaware that he was also owner. The court noted that JAMS “repeatedly stymied Olympic Eagle’s efforts to obtain details about JAMS’ ownership structure and the Arbitrator’s interest post-arbitration.”
In a decision on October 22, 2019, the Ninth Circuit held, over a dissent, that the arbitrator’s omission of his ownership interest was enough to warrant vacatur, especially in light of the “more than trivial” volume of Monster’s business with JAMS—97 cases administered over five years.
The decision has garnered much attention, particularly because JAMS is structured differently from some other arbitration providers. The American Arbitration Association’s (AAA) arbitrators, for example, have no ownership interest in the AAA, and the AAA itself is a not-for-profit entity. AAA arbitrators are independent contractors, with no exclusivity requirements or substantial interest in the financial health of the AAA. The dissent argued that the arbitrator’s disclosures should have been more than enough to let Olympic Eagle decide whether the arbitrator might have had an incentive to favor Monster for his own business purposes. Monster, after all, was a “repeat player,” and it is in the arbitrator’s economic interest to be appointed to as many arbitrations as he can. What, really, does a disclosure about his ownership interest in JAMS add?
But in the end, even if the Ninth Circuit is the last word and the Supreme Court does not review the case, the decision is unlikely to have an immediate and widespread effect beyond JAMS. As the majority noted: going forward, JAMS owner-neutrals will likely update their disclosures in pending and future cases, and looking backward, the limitations period for seeking vacatur of a final award under the FAA is three months. So, there should be no wholesale uncertainty about the finality of older arbitral awards.
JAMS and other arbitral bodies with similar ownership structures may also consider updating their procedures for disqualifying arbitrators. If Monster is to be an influential case, it will be when the next shoe drops. What happens when an arbitrator makes the disclosures that will now be required, a party (say, a consumer who entered into a form contract with an agreement to arbitrate) seeks to disqualify the arbitrator for partiality, and the challenge is unsuccessful? The real question lurking here is not a question about disclosure, which as we have seen is a problem that can be remedied, but a question about the substantive problem posed by repeat players—the businesses and law firms that routinely bring cases before an arbitral body.
Published in Section of Litigation-Alternative Dispute Resolution Practice Point, January 2, 2020 © 2020 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association